Tag: wealth management

Fundamental Thoughts – The Search for Stability

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Dear Investor,

One of the biggest challenges for investors is to find a few valuable firms out of the 5000+ listed companies on the Indian stock exchanges.

This search is not easy; it cannot be done very fast; I would say it is a multi-year process.

Many great investors have suggested and used many criteria, but one simple important one I have is STABILITY.

What does this mean and how does an investor implement this in his portfolio?

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Stability for me means a firm that:

  1. Shows a steady pattern

    on its key financials such as Revenues, EBITDA and Net Profits. This does not mean micro level steadiness such as quarter to quarter improvements. I would be more concerned about year to year steadiness, and a sense of expected things happening.

  2. Does not dilute its Equity Share Capital much

    While 10-15% dilution every 3-4 years is ok, anything much more is a worry point. All dilutions affect older investors as EPS will fall to the extent of dilution. Dilutions by Rights issue are good for shareholders as they can participate in this corporate growth. Aggressive dilutions for new acquisitions or excessive ESOPs have to be assessed for stockholder benefits. PSUs typically have Share Capitals that do not change at all over the years. Banks are an exception to this rule as they are in the business of loans and the cheapest funds are available through equity dilutions.

  3. Has Low Debt

    For a firm, an important source of funds is debt. It does not involve equity dilution. However if things are going badly for the firm, it excesses on Debt, or is unable to repay. Sectors in India like Insurance, Telecom and Infrastructure (that are at an early stage of growth) suck in cash and need a lot of debt to develop their operations and may over-leverage and have to pay high finance charges that depress profits. Check the Debt Equity ratio for your target firm. A ratio higher than 2.0 for Infrastructure firms and over 1.5 for other sectors is a Red Flag. Unless its a rare turnaround situation.

  4. No Pledging of Shares

    Promoter stability is an essential to a good equity investment. A promoter that pledges his shares exposes his firm to a situation where a fall in share price (for any reason) will trigger a sale of his shares by the lender that will accelerate the fall of prices. The possibility of this happening may be low, but the consequences are bad, so investors should check the shareholding pattern of a firm before investing.

Remember as an investor, the advantage you have is you can walk away from a share investment if it does not meet your criteria. There are many fish in the sea. And Stability is an important concept in my search for great investment ideas.

Hope you liked the idea !!

Happy investing,

Punit Jain

Founder, JainMatrix Investments

JainMatrix Knowledge Base:

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MidCap Portfolio – Celebratory Outperformance

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Date: 25th Dec 2014

JainMatrix Investments Mid & Small Cap Model Portfolio: Monthly Update

In this, our last report of 2014, we wish our Subscribers and Readers a Merry Christmas and a Happy New Year. Its time to be grateful for the wonderful gifts of 2014.

We also present readers with the Celebratory results of our Mid & Small Cap Model Portfolio, where we outperformed the benchmarks by an annualized 54%.

We present the Dec 2014 update on this portfolio, with a refresh of key data.

 

Our portfolio is only shared with Subscribers. 

 

Portfolio Objective, Theme and Performance

  • JainMatrix Investments launched its Mid and Small Cap portfolio in Feb 2013.
  • The objective of the MSCMP is to outperform the Mid and Small Cap indices by large margins.
  • It consists of 7 mid & small cap firms that are out-performers from identified 3-5 sectors.
  • Firms are introduced into the MSCMP with a minimum holding period of 1 year.

 

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  • The current investment theme is – IT services, Auto ancillaries, NBFCs, infrastructure and rural/ semi urban consumption.
  • In a mildly corrective environment of Dec 2014, the portfolio performed well. On average the active portfolio shares were up by annualized 83.9%.
  • The CNX Midcap, BSE Midcap and BSE Smallcap were up by 25.6%, 24.6% and 29.7% on an annualized basis over 23 months. These have fallen mildly in the last month.

  • The JainMatrix Investments active Mid & Small Cap Model Portfolio outperformed the indices by 54.2%.

  • The investor should continue his investing process with the MSCMP in a SIP mode.

Some previous updates for the JainMatrix Investments Mid and Small Cap Model Portfolio

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Disclaimer

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an independent Financial Expert/Advisor. Either JM or its affiliates or its directors or its employees or its representatives or its clients or their relatives may have position(s), make market, act as principal or engage in transactions of securities of companies referred to in this report and they may have used the research material prior to publication. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com

KEC International is a Modern Powerhouse

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  • Date: February 16, 2012
  • CMP: Rs 60.6
  • Advice:  Firm is valued at Rs 82; available today at 37% discount
  • Target:   March 2014 target of 245

KEC International is the second largest transmission tower manufacturer in the world. It delivers such projects in 45 countries. Synergistic diversifications into Power Systems, Telecom, Water and Railways have de-risked the business. The SAE Towers acquisition (USA) in 2010 was also successful. The Order Book is at 2.2 times FY11 sales. In the last 6 years, Price has barely increased by 1% while the EPS growth is 30% CAGR. The steep price fall of 2011 is done with, and the recovery has started. The KEC share is available at a 37% discount to valuations. Invest for long term in this ‘modern powerhouse’.

Subscribers have received this report around 16th Feb or later on subscribing

KEC International – Description and Profile

  • KEC International is an Engineering Procurement and Construction (EPC) company focused on Power Transmission. It is the largest transmission tower manufacturing company in the world.
  • It is the 3,900 crores (FY11) flagship company of the RPG group. Current Market Cap is 1609 crores.
  • In addition to Power transmission, it has diversified into related areas like Power Systems, Cables, and new verticals like Railways, Telecom and Water. 90% of customers are Government firms.
  • Beyond India, it has supplied power infrastructure to 45 countries globally. In addition, in Sept ‘10, KEC took over SAE Towers, a US based lattice transmission towers manufacturer, for $95m giving it a strong North & Latin American footprint. The acquisition / integration has been successful.
  • Manufacturing plants are in India – Nagpur (Mah.), Jabalpur (MP) and Jaipur (Rajasthan); Americas – Monterrey (Mexico), Belo Horizonte (Brazil). Total tower manufacturing capacity is 251,000 MTs.
  • The shareholding pattern, indicates wide ownership with Indian Institutions (good) and medium Promoter ownership (fair)
JainMatrix Investments

Fig 1 – Shareholding Pattern of KEC – Click to expand

  • Employees number over 4200; Order Book is Rs.9,200 cr, giving about 2.2 years of visibility (@FY11).

Business Model and Strategy:

  • The core capability of KEC is its ability to deliver power transmission lines to Utilities, from design, to materials procurement, to execution, involving Project Management, Design & Engineering skills.
  • In a form of evolution and growth in related areas, KEC has expanded by:
  1. Backward integrated into Cables – manufacture and implementing cabling solution
  2. Forward integration – into Power Systems, designing and constructing substations (range of 220 to 1150 kV substations) and Electrical Balance of Plant (E- BOP) delivery services.
  • Looking beyond the Power industry, KEC has been able to reposition its EPC and manufacturing for:
  1. Telecom industry – telecom towers, cabling, installation and commissioning
  2. Railways EPC work (an acquisition, Jay Railway Signaling undertakes the railway infra projects)
  • Civil infrastructure – bridges, tunnels, workshop modernization, building of stations
  • Tracks related – new track laying/ improve old tracks, electrification /power systems.
  • Signaling and telecommunication network.

3. Water – this includes Irrigation and Hydroelectric construction, Embankment and Flood Control, Sewage and industrial effluent treatment and Potable water treatment and distribution

  • KEC is successfully diversifying its business, thus de-risking the overall business portfolio. See Fig 2.
JainMatrix Investments

Fig 2 – Order Book Breakup of KEC – Click to expand

Industry Note:

  • Classification: Power Industry is broadly classified into Generation, Transmission and Distribution.
  • The Indian power sector faces huge demand growth. But the government’s power capacity Plan v Achievement has been as low as 51.5% in the 10th Plan. (We are in 11th Plan now). The shortfall of peak power has been 8-12% in the last decade. Over 40% of Indian population still doesn’t have access to electricity. Many have access to poor quality power.
  • The Public sector dominates the industry, owning 70-80% of current assets. However the government is opening up to the Private sector. In future, 50% of investments are expected to be from the Private sector.
  • Power Generation has grabbed a lot of interest, but focus in India is now shifting to Transmission, as in 2-3 projects, even after generation and fuel linkages were in place, the Power Evacuation facilities were not ready and all stakeholders are suffering due to the delay.
  • Key players in the Power Transmission EPC are Areva T&D, Kalpatru Power, Jyoti Structures, Alstom Projects, etc. It’s a crowded market, and competition includes infra diversifieds like L&T, GMR and Reliance. A quick analysis shows among the listed focused firms, KEC has a 10-15% mkt share.
  • The Transmission industry bidding norms have changed recently to ‘Tarriff Based Competitive bidding’, where the Service Providers like KEC are responsible for Build, Own, Operate and Transfer of power lines. TSPs earn in the form of Transmission Charges payable by long-term customers.
  • Also see reports on other related firms – BGR Energy Systems; Bottom Fishing and Winds of Change

Unique strengths of KEC

  • Diversification of KEC beyond the Transmission EPC sector is good, as diverse businesses follow different cyclical patterns. Businesses set up in the last 3 years account for 30% of Orders Booked.
  • KEC has good presence beyond India, with 55% of current Orders Booked from other regions. In the present power cyclical down phase in India, KEC is focusing on business in other geographies.
  • As the flagship RPG Group firm, KEC enjoys good management focus for its initiatives. Established in 1945 as Kamani Engineering Company, the firm has a rich past, and has again reinvented itself into a modern powerhouse. Ramesh Chandak, the MD & CEO is a CA and has lead KEC for the last 10 years.
  • Following the ‘10 SAE towers deal, KEC is now looking at additional acquisitions to accelerate growth

Stock valuation, performance and returns

  • KEC has shown a fine growth pattern (Fig 3) with Sales growing 18% CAGR over the last 6 years.
JainMatrix Investments

Fig 3 – Quarterly Sales and Profits at KEC

  • Net profit has grown very well at 24% CAGR.
  • Share price however has been volatile, moving to an all time high (in 2008) and low (in 2009).
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Fig 4 – Price and dividends at KEC

  • EPS has been growing rapidly at 30% CAGR. Cash Flow however has been uneven.
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Fig 5 – KEC – EPS and Cash Flow

  • Current PE at 9.3 is lower than current Industry average of 17.
  • The Price and PE chart – Fig 6 – indicates that current valuations are in the bottom quarter of 6-year historical charts. Definitely indicates undervalued status. This is in spite of the 90% surge from 20th Dec ’11 low of 32.
JainMatrix Investments

Fig 6 – Price and PE Chart of KEC

  • Price and EPS graph, Fig 7, shows that EPS accelerated till ‘08, then has been in the 5.5 – 7 range for next 3 years. The EPS should see an upside breakout from this range in the next few quarters. My expectation is that EPS will grow in the sector drawn in this chart.
JainMatrix Investments

Fig 7 – Price and EPS Chart

  • Debt equity at 1.51 (FY11) is very comfortable for an infrastructure firm.
  • Orders Booked to Billings, Fig 8, shows an improvement over the last two years.
Orders Booked to Billings Ratio for KEC International, JainMatrix Investments

Fig 8 – Orders Booked to Billings Ratio for KEC

  • Return on Capital Employed, ROCE, has been in a 22-40% range for the last 6 years.
  • Return On Net Worth, RoNW, also has been at 17-38% range. These are good numbers.
  • Operating margins have been hovering around 10% for last 3-4 years. This year’s high competition and entry into new sectors pushed it to around 8%. We expect this to revert to 10+ levels from FY13.
  • Cash and Cash equivalents are at 800 crores. Plus with a low DE ratio, KEC has access to a healthy war chest of internal cash plus debt with which they can look at new acquisitions.
  • PEG is at 0.4 – indicates safety and undervalued status

Financial Projections, with FY14 estimates

The consolidated financials and PE of KEC have been projected for the next 3 years.

Key Financials and Projections (Source: JainMatrix Investments)

Fig 9 – Key Financials and Projections (Source: JainMatrix Investments)

Risks:

  • Domestic interest rates unpredictability. This will affect the growth projections.
  • Hyper competition. Orders booked in the last 12-18 months in India have been at lower margins due to high competition. The projections assume an easing up of this in India.
  • Indian Power sector challenges. The key current issues are (1) financial stress among Utilities, particularly State Electricity Boards that are facing Tariff inflexibility and Collection issues, (2) Power Plants facing issues with fuel linkages and a shortage of Coal & Natural Gas, and (3) project execution delays due to government clearances like environmental, land acquisition, etc. This has affected the investment climate in this sector. The projects under execution by KEC are also affected, and execution/commissioning may be delayed.
  • Business uncertainty in MENA region – already a part of the order book is affected due to unrest.
  • Unpredictable events like a European sovereign default, some new media issue/ bad publicity or any governmental charge sheet, etc. can occur that can mar equity performance for short periods.
  • Past performance is no indication of future results

Opinion, Outlook and Recommendation

  • India has a surging growth in electricity demand, yet there is a 9-13% power deficit today. This will widen in the next few years.
  • Globally the thumb rule is that every rupee invested in generation must match an equal investment in T&D; however, in India it has been 1:0.5. There is now a huge opportunity for T&D players.
  • As a leading transmission EPC Company, KEC’s fortunes are linked to the regulatory environment and overall industrial climate of the Indian power sector. In a stable / improving environment, KEC should perform excellently based on the current manufacturing and execution capacities.
  • In 6 years, share price (adjusted) has increased by 1% while the EPS growth is 30% (CAGR). Other metrics like Sales, Orders Booked, Debt, etc too are favorable. The share is definitely under-priced.
  • Current price is low due to poor sentiment/ pessimism in the Indian markets around the Power sector. However KEC is well diversified across geographies as well as business segments.
  • From the steep fall of 2011, the share has bottomed out and risen rapidly of late, and is now at the key 200 DMA levels. Price should rise above this key level, and stay above for a fair period of time.
  • Near term positives include the weakening of the INR against the USD that should boost KEC revenues and profitability. It is an exporter of services, but most of its costs are in INR.
  • In FY12 end, and next few quarters, a lot of pending Power transmission projects are to be bid out, and KEC will win a fair share of new business.
  • The JainMatrix Investments valuation study prices the company at Rs 82, and so the share is today available at a 37% discount to this valuation 
  • March 2014 target of 245, giving a 300% appreciation.


For a pdf copy of this report, mail punit.jain@jainmatrix.com

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Disclosure: It is safe to assume that if the JainMatrix website recommends a stock, the researcher has already invested in it.

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India’s Investment Rockstars

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Poll Results on 22nd March

Thank you readers for your enthusiastic participation in this Poll.

The Winner of the Poll on India’s Investment Rockstars is – Madhusudan Kela.

Here is a graphic of the candidates – with one additional name from Reader suggestions.

Investment Rockstars Poll - JainMatrix Investments

India’s Investment Rockstars – Poll Results (Click to enlarge image)

Poll Article on March 7

I recently saw the Hindi movie, Rockstar. Its an interesting story of an unknown, young but talented singer. He dreams big, wants to become like the famous singing heros of the past. He does eventually :-), but the journey is interesting, including pain, penury and a rocky love life along the way.

A singing Rockstar is a somewhat new concept in India. Maybe A R Rehman and Remo Fernandes are two who are almost there. In the US there is a developed musical touring culture, and many budding artistes develop into very successful Rockstars.

What does this have to do with Investing, you may ask. Give me a few more minutes…..

What does a Rockstar do for listeners? He performs on stage, providing spectators an emotional connect and excitement. This effect even lasts after the live performance, on replaying the music.

Actor Rockstars: In India we do have a few Actor Rockstars, with Shah Rukh Khan, Hrithik Roshan, Aamir Khan and Katrina Kaif coming to mind.

They play roles on screen that entertain and amuse; they dance, sing and depict characters and actions that we like. If the movie has a strong message, then it can even inspire us, like Gandhi or maybe even a Rang De Basanti.

Do we have any Investment Rockstars in India?

Who is an Investment Rockstar? I would say he is one who is very good at investment, and has made many successful decisions. He should be a visible, high profile, believable expert. Importantly, he has to have shared his investment decisions with the public, so they have gained from his expertise. His advice should help viewers make decisions that guide them in their lifelong wealth building process.

Poll on Investment Rockstars

Please take part in this Poll on who would you rate as Investment Rockstars in India. This list can include foreigners, if they have invested / commented on Indian firms. You can choose upto 10 from this list, and also add some names. In alphabetical order here are 12 candidates (apologies for missing anyone :-)).

This Poll is open till 15/03. Please fill this only once. Check back on this website www.jainmatrix.com for results.

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  5. Add your comments/ queries below

Disclaimer:

These reports and documents have been prepared by JainMatrix Investments. They are not to be copied, reused or made available to others without prior permission of JainMatrix Investments. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com

Also see: https://jainmatrix.wordpress.com/disclaimer/